Blair says fuel duty cut would be difficult

The Economics

Tony Blair insisted yesterday that the Government's room for manoeuvre in cutting fuel duties was extremely limited, and described VAT receipts from petrol as small.

Tony Blair insisted yesterday that the Government's room for manoeuvre in cutting fuel duties was extremely limited, and described VAT receipts from petrol as small.

"Actual receipts by the Treasury are ... not enough to fund a significant fraction of a 1p cut in duty," he said. He added that the impact of an increase in oil revenues on overall expenditure would be considered later in the year.

On a litre of fuel costing 85p, about three-quarters represents government duty and VAT. The duty element of pump prices is levied at about 49p a litre, irrespective of the underlying price of petrol, while VAT is levied at the standard rate of 17.5 per cent on the combined cost of petrol and duty.

Before the crisis, several oil companies said their share of forecourt operations made negligible returns, or even a loss in some cases.Analysts have said there could be scope for limited reductions in pump prices after tax when the Pre-Budget Report is drawn up in November. But they also warned that will depend on possible changes in the price of crude oil over the coming months.

Mr Blair, seeking to defuse the calls for an immediate reduction in the tax component of pump prices, said: "It is important to understand, and for the public to understand, petrol duty has not been the sole problem ... There has been some completely misleading speculation about the Government sitting on some vast windfall from the oil price rise."

The Institute for Fiscal Studies (IFS), an independent analysts' body, said yesterday it estimated that this year's buoyant crude prices had brought the Treasury an additional £930m since the start of the year. It also estimates that to fund a 1p cut in petrol duty would cost the Treasury about £420m a year.

Zoe Smith, an IFS economist, described Mr Blair's comments as "pretty sensible".While many analysts foresee an extended period with crude stuck at about $30 a barrel in the coming months, most expect a drop in price next year as producers increase on-stream capacity and supply.

Mr Blair said: "As for higher oil revenues, this has to be determined in the round at the end of the financial year and depends entirely on what happens to oil prices in the future."